Debt Ceiling Deal Ends Government Shutdown, Lawmakers Will Honor American Credit


Photo credit: Wikimedia

In recent weeks, the legislative process in Congress has resembled a game of chicken: as the nation hurtled toward economic crisis, each party waited for the other to blink.

Republicans demanded concessions in paring down the Affordable Care Act, or Obamacare, in exchange for their cooperation in ending the government shutdown and authorizing the Treasury to take out the new debt needed to pay the country's bills.

Democrats wanted to make it clear that they would not negotiate at all over preserving the basic functions and full faith and credit of the government. When they've played this game before, the Democrats lost, but on Wednesday it was the Republicans who blinked. That's good news for workers, taxpayers, businesspeople and investors of all political stripes.

The Senate announced a deal on Wednesday that would provide a straightforward reopening of the government and a hike in the national debt ceiling. Democrats didn't get everything they wanted: Obama had hoped to put these fights off for a year, but the bipartisan Senate agreement only keeps the government open until Jan. 15, and only authorizes enough new borrowing to keep the bills paid until around Feb. 7.

Speaker of the House John Boehner
Photo credit: Wikimedia

While that may seem like the nation has only averted catastrophe for a few months, the deal indicates to me that Congress won't be playing games with the debt ceiling any time in the near future. Why? Because as a political tactic, Republicans have admitted that threatening not to raise the debt ceiling was a loser. Polls have been showing for weeks that Republicans bear the brunt of public outrage over the debt debate, but Republican leaders are now acknowledging this as well.

The standoff was "a very bad two weeks for the Republican brand," according to Republican Senator Lindsey Graham.

"We fought the good fight, we just didn't win," Speaker of the House John Boehner told a radio station in his home state of Ohio, as he confirmed that using the debt ceiling would no longer be a tactic in the party's continued fight against Obamacare.

While political debate is healthy, it's heartening for Main Street and Wall Street alike that threatening default will no longer be a weapon in the political arsenal.

The debt ceiling is what matters

The impasse began last month when Republicans in the House of Representatives balked at passing a continuing resolution that would extend the government's budget, which would allow it to continue functioning normally, unless the budget also included lower funding for the Affordable Care Act, considered Obama's signature piece of legislation. The resulting government shutdown has hurt hundreds of thousands of government workers who temporarily lost their jobs, and the closure of national parks and monuments has generated heated press coverage and hurt businesses that rely on the tourism these sites drive.

However, most Americans weren't suffering greatly from the shutdown even as it stretched into its third week. Shutdowns are unpalatable, but there have been 18 of them over the past 40 years, eight of which lasted longer than a week and the most recent lasting for three weeks, and the country is still here. What has never happened, not once in American history, is a failure to raise the national debt ceiling to allow the government to keep paying its bills. Since it's never been done, we don't know exactly what would happen, but President Obama would be left with a few unsavory and illegal options.

Regardless of which route would be taken, a Congressional failure to authorize timely debt repayment would make global investors more wary of investing in Treasury bills, thereby raising the interest rate the U.S. government has to offer to sell its debt.

That wouldn't just mean that U.S. taxpayers would be on the hook for even more money to pay back the national debt, it would also throw the global economy for a loop. Treasury bills are so widespread that they are used both as collateral in many lending deals and as a sort of global benchmark for interest rates. A default in Treasury payments could therefore raise borrowing costs for mortgages, student loans, small business loans, and corporate bond sales. That would slow down economic growth, perhaps even tipping the U.S. back into a recession.

So while this may be as close as Washington has ever come to defaulting on U.S. debt, the fact that lawmakers walked away from the brink despite vast ideological differences and record partisan bickering should assure the American people that political rhetoric won't get in the way of the country making good on its debts. With the threat of default largely defanged by Republicans' agreement to raise the debt ceiling without significant concessions on Obamacare, investors, retirees, students, homebuyers and businesspeople should expect that Washington won't fool around with the full faith and credit of the U.S. government any time soon.

Now what to do about all this debt?
While I don't expect the debt ceiling to be up for debate again in the next few months, there's still the matter of addressing the looming debt crisis. The U.S. government has piled on more than $10 trillion of new debt since 2000. Annual deficits topped $1 trillion after the financial crisis. Millions of Americans have asked: What the heck is going on?
The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!

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